Living with the “T” word

08/23/21
  • Stocks slip, oil sell-off slams energy sector
  • Fed minutes hint at taper timeline
  • This week: Fed inflation, durable goods, home sales, Jackson Hole

The US stock market will kick off a new week in rebound mode after its first notable pullback in a month, as minutes from the most recent Federal Reserve meeting confirmed the central bank is preparing to dial down its economic stimulus and the delta variant kept COVID in the headlines.

But the week looked much worse Thursday morning than it turned out to be. After hitting another all-time high last Monday, the S&P 500 (SPX) slid to a nearly one-month low on Thursday before reversing intraday and following through with a Friday rally to end the week with a modest loss:

Chart 1: S&P 500 (SPX), 7/14/21–8/20/21. S&P 500 (SPX) price chart.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


The headline: Stocks stumble as Fed keeps taper front and center.

The fine print: Last Wednesday’s Fed minutes revealed some debate about when the central bank would begin scaling back the monthly bond purchases it has used to energize the economy (an effort that has also been accompanied by a record-setting stock market rally), but the emerging consensus is that the Fed wants to begin the process before the end of the year.1 So far, the market’s reaction has been a little more robust than it was after the last time the Fed rang the taper bell in mid-June. But Morgan Stanley analysts have also highlighted areas of the market that are potentially more vulnerable to tapering and an uptick in longer-term interest rates.

The move: Virpax Pharmaceuticals (VRPX) soared 265% to $11.15 on Tuesday, tacked on 49% (135% intraday) to close at $22.90 on Wednesday, then slid 32% to $15.55 by Friday in the wake of favorable feedback from the Food and Drug Administration about its anti-viral nasal spray.2

The scorecard: The Nasdaq 100 (NDX) tech index held up best last week while the small-cap Russell 2000 (RUT) suffered its sixth-worst week of the year:

US stock index performance table for week ending 8/20/20. S&P 500 (SPX), Nasdaq 100 (NDX), Russell 2000 (RUT), Dow Jones Industrial Average (DJIA).

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


Sector roundup: The strongest S&P 500 sectors last week were health care (+1.9%), utilities (+1.7%), and real estate (+0.6%). The weakest sectors were energy (-7.3%), materials (-3.1%), and financials (-2.3%).

Highlight reel: In addition to VRPX’s fireworks, DLocal (DLO) +27% to $62.43 on Thursday, Ontrak (OTRK) -45% to $11.68 on Thursday.

Futures action: It was a rough week for October WTI crude oil (CLV1), which tumbled to a three-month low of $61.85/barrel on Friday. December gold (GCZ1) traded mostly sideways last week after the previous week’s plunge-and-bounce move, closing Friday at $1,781.40. Biggest up moves: September VIX (VXU1) +5.3%, August bitcoin (BTCQ1) +4.7%, October pork cutout (PRKV1) +2.6%. Biggest down moves: September palladium (PAU1) -14.4%, October RBOB gasoline (RBV1) -10.9%, December soybean oil (ZLZ1) -10.5%.

Coming this week

It promises to be a busy week. Traders undoubtedly will be watching the annual Jackson Hole Economic Symposium for more clarity about tapering, but they'll also have durable goods, home sales, and the PCE Price Index (the Fed’s primary inflation gauge) to look forward to:

Today: Chicago Fed National Activity Index, Markit Manufacturing PMI (flash), Markit Services PMI (flash), Existing Home Sales
Tuesday: New Home Sales
Wednesday: Durable Goods Orders
Thursday: GDP (1st revision), Jackson Hole Economic Symposium
Friday: Personal Income and Consumer Spending, PCE Price Index, Trade Balance in Goods (advance), Michigan Consumer Sentiment, Jackson Hole Economic Symposium

Get ready for Retail Earnings, Week 2 (with some notable tech sprinkled in):

Today: Palo Alto Networks (PANW)
Tuesday: Advance Auto Parts (AAP), Best Buy (BBY), Intuit (INTU), Williams-Sonoma (WSM), Urban Outfitters (URBN), Nordstrom (JWN), Medtronic (MDT)
Wednesday: Ulta Beauty (ULTA), Box (BOX), Dick's Sporting Goods (DKS), Splunk (SPLK), Snowflake (SNOW), Salesforce.com (CRM)
Thursday: Burlington Stores (BURL), Bill.com (BILL), Dollar General (DG), Dollar Tree (DLTR), Gap (GPS), HP (HPQ), Peloton (PTON), Marvell Technology (MRVL), Workday (WDAY)
Friday: Big Lots (BIG)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

Milestones or millstones?

Before pulling back last week, the SPX closed at 4,479.71 on Monday—100.22% above its March 23, 2020 close of 2,237.40. That was the fastest the benchmark had doubled since it expanded to 500 stocks in 1957.

That was just one of many milestones this year—and for contrarians and perma-bears, another indication of how potentially overbought the market is. Here’s another: August is already in the books as the ninth-consecutive month the SPX has hit either a higher monthly close or high, a run it’s matched or exceeded only 18 other times since 1960.3 Here’s what the index did after the others:

Chart 3: S&P 500 performance after 9-month streaks of higher highs/closes, 1960-2021.

Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)


While the SPX extended these runs, on average, for another four months and gained an additional 8%, it’s important to note a couple of exceptionally long runs distorted the averages to a certain extent. For example:

1. The most common result (four out of 18 times) was no extension—i.e., the streak ended at nine months.

2. Take away the two longest extensions—an additional 10 months in 1995-96 and an additional 15 in 2006-07—and the average streak extension shrinks to 2.7 months, while the average gain for the remainder of the streak falls to 5.9%.

The SPX’s average gain in the first six months after establishing a nine-month streak was 3.4%—less than the index’s 4.1% average for all six-month periods since 1960. The SPX’s average gain 12 months after the nine-month streaks was 8.1%, in line with the overall 12-month average return of 8.2%. Again, though, take away the two-longest runs and the SPX’s average six-month gain after a nine-month streak drops to 2.2% and 12-month post-streak return falls to 7.3%—both figures underperforming the index’s benchmark returns.

The market has certainly been on a historic run, and all good things eventually come to an end—at least temporarily. But it’s always easier to say a market is overextended than to know when it will actually put in a significant top.

 

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1 CNBC.com. The Fed is closing in on the taper, but there’s a lot the market, economy still can’t know for sure. 8/18/21.
2 MarketWatch.com. Virpax's stock rockets nearly 5-fold in 2 days after upbeat FDA response to its SARS-CoV-2 inhibitor. 8/18/21.
3 All figures reflect S&P 500 (SPX) monthly data, December 1957–August 2021. Supporting document available upon request.

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